By Fester:
The Post Gazette reports that the Stadium and Exhibition Authority is in a big fight with the new casino owners. The crux of the fight is when the casino owners will start kicking in to cover the hockey arena bond payments.
The SEA wants the casino, by Oct. 1, to begin making annual payments of $7.5 million for the next 30 years, so money can be paid to the investors who bought the bonds being used to finance construction of the new Penguins arena. Such payments to bondholders are to begin this fall, said SEA lawyer Robert Graci.
However, Rivers Casino officials think their deal with the SEA permits the $7.5 million annual payments to start in 2010 or even 2012, casino lawyer John Donnelly told the Gaming Control Board today.
Why is this a big deal, or at least potentially a big deal? If the bonds are not paid, it severely tests a strange backing agreement. Chris Briem has the contract language from the bond prospectus:
Found in this state bond prospectus (page 57 per the pdf numbering) is a more concise explanation of what the state's obligations are with regards to the arena bond...
In October 2007, the Commonwealth and the Sports and Exhibition Authority of Pittsburgh and Allegheny County (the �SEA�) entered into a lease agreement (the �Arena Lease�) that, while not creating indebtedness of the Commonwealth, creates a �subject to appropriation� obligation of the Commonwealth. The SEA, a joint public benefit authority, issued in October 2007 its $313.3 million Commonwealth Lease Revenue Bonds (the �Arena Bonds�) to finance a multi-purpose arena (the �Arena�), which will serve as the home of the Pittsburgh Penguins (the �Penguins�), a hockey team in the National Hockey League. The Arena Bonds are not debt of the Commonwealth but are limited obligations of the SEA payable solely from the Special Revenues pledged therefor. These Special Revenues include annually (1) $4.1 million from a lease with the Penguins, (2) not less than $7.5 million from the operator of a casino located in the City of Pittsburgh, and (3) $7.5 million from the Commonwealth�s Economic Development and Tourism Fund (the �Development and Tourism Fund�). The Development and Tourism Fund is funded with an assessment of five percent of the gross terminal revenue of all total wagers received by all slot machines in the Commonwealth less cash payments. While the Special Revenues currently are projected to be adequate to pay all debt service on the Arena Bonds, to the extent such revenues are in any year inadequate to cover debt service, the Commonwealth is obligated under the Arena Lease to make up the deficiency. The obligation of the Commonwealth to make such payments is subject in all cases to appropriation by the General Assembly. The maximum annual amount payable by the Commonwealth under the Arena Lease is $19.1 million. (emphasis added)
I have been puzzled by this language for a couple of years now. The language is basically structuring a moral guarantee without it being an actual guarantee that the state of Pennyslvania will actually pay off the hockey arena bonds if the expected cash flow dows not materialize. The bond prospectus basically says that the state is responsible for all payments uo to $19.1 million dollars per year if and only if the Legislature approves. The guarantee is contigent on Legislature approval.
One would argue that the probabilty of needing the backing of the state is inversely correlated with the willingness of the state to appropriate a bail-out of an arena project. When times are good, the state would have the money and the willingness to spend the money but the revenue streams from gambling would be strong. In weak times, gambling revenue would collapse, but still would the state's willingness or ability to pay.
So what happens to the SEA or state's credit ratings if the Legislature does not appropriate a back-stop reserve?
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